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Lear Capital: Chinese Gold Demand – Is it Really Falling?

Yesterday, Gold prices drifted lower on news that Chinese gold demand fell 19% over the first half of this year. Silver prices followed as some investors question whether or not the gold and silver bull markets are still intact. Perhaps it is time to reflect on the purpose of diversifying a portfolio with precious metals.

Historically, gold and silver have been used as a means to store wealth and to protect against unforeseeable financial disaster. In pre-currency times, if crops failed, a store of gold and silver allowed a farmer to purchase what they could not grow or produce themselves. In our modern economy, precious metals have also assumed the role of inflation hedge. As the purchasing power of paper money falls, gold and silver help to preserve that power.

Indeed, smart investors agree that a diversified portfolio is necessary to protect against potential disaster. To a person, I think smart investors would also agree that the best time to take a defensive position is before the disaster strikes when economic times are good or, at least appear to be. If you wait for the disaster to invest, you will either miss out entirely or the protection you seek will be unaffordable.

I can see China drooling now at the prospect of buying more cheap gold. On news that its gold purchases dropped 19% from last year’s record highs, gold prices slipped to a five week low. It always amazes me how the news of something that already happened has more effect on the price than the actual event. In a true supply demand economy, the price varies along with supply and demand. It happens in real time.

So, let’s get this straight. While China was supposedly buying less gold the price was rising. But, because we discovered, after the fact, that China was buying less gold, we are supposed to conclude the price should have been falling. The markets had it wrong. In real time the markets were pricing gold like there was more demand than supply.

This is tantamount to saying the laws of supply and demand no longer apply. The real-time price they dictate on any stock, bond, commodity or product is wrong. The actual price, something should have sold for, cannot be determined until months after the actual trades have taken place. And the herd believes. Now we know why the one-percenters have all the money.

When I heard the reports, I immediately heard something different than what was being said. In real time, I heard…

“Today we learn that in the first half of 2014 China has been buying 19% less gold than they did last year during the same period. But, despite this apparent cutback in purchases, the gold and silver prices outperformed the markets, rising as high as 10% in the first half of the year. This begs the question, if China is buying less gold, who is buying more?”

Then they should have called an expert and asked, “If China is buying less gold, who is buying more?” The expert could then answer…

“Dabney, it’s not a question of who’s buying more – this is a supply issue. The Gold supply is shrinking. Naturally, if there is less gold on the market to sell there is less gold to buy. That’s why the price rose on seemingly, less demand”

For months, stories of a shrinking supply of gold and silver have been pervasive throughout the Internet. Yet, the story has yet to get any traction in the mainstream media. Instead we hear China is buying less gold.

China has become the tail that wags the Western dog.

If China has engaged in a long term plan to corner the market on gold they have to be laughing at how easy it is to drive the gold price down by simply backing off purchases for a few months.

It’s no secret that both India and China have been buying silver as well. In one month, according to Eric Sprott, India bought 22% of the silver produced. According to another report, China demand alone could help drive the silver price to $250 an ounce by 2015.

Now we see another potential story behind the story.

Headline: In the First Half of 2014, China Backs Off of Gold Purchases and Like India, is Buying More Silver.

Imagine what a headline like this would do to the silver price. In my humble opinion, I think we just got confirmation that gold and silver supplies are shrinking while demand is rising. And, the only way the story could have been told, in a manner that brought both prices down, was the story we heard.

To me this is all great news. It means the window of opportunity to accumulate more disaster protection is still open. I believe that debt, which has risen 80% higher since before the last crisis, could bring about another crisis of epic proportion. I believe the world is secretly accumulating physical gold and silver in preparation thereof. What do you think?

As always, this is just my opinion often not shared. Although today may be different. Both Gold and silver prices are rebounding amid reports that both the gold and silver bull markets are over. If you share my opinion, even once in awhile, I would be honored to have you follow me @DaveTheGoldDr.